AI & NFTs: Key Legal Developments & Litigation Scorecard (2/21/23)
AI & NFTs: Key Legal Developments & Litigation Scorecard (2/21/23)
Major NFT & AI Developments, Where Key NFT & AI Litigation Stands, and Why You Should Care (Including Detailed Analysis of the Current State of Play)
AI & NFTs: Key Legal Developments & Litigation Scorecard (2/21/23)
Welcome to Creative Media’s NFT & AI Legal Update newsletter that focuses on the always-evolving, and frequently perplexing, legal and litigation landscape that surrounds Web3 and NFTs, together with a healthy dose of artificial intelligence (AI). I track key developments for you, because they define your “rules of the game” - issues that impact everyone in the overall media, entertainment and creative ecosystem. And we advise and collaborate with leading companies in these worlds, so our depth is, well, deep! (Creative Media is my media, entertainment & tech law and business advisory firm. We work deeply in the world of AI and Web3 with leading companies (check out our impressive clients). Think of us as your external General Counsel and business development experts. Reach out to me, Peter Csathy, at peter@creativemedia.biz).
I. THE BIG STORY - HERMES WINS METABIRKINS NFT TRADEMARK CASE
YES, I PREDICTED IT! A nine-person jury found Metabirkens creator Mason Rothschild (real name Sonny Estival) liable on all three counts - trademark infringement, dilution, and cybersquatting. Back in October I wrote the following in these very pages: “Importantly, the court also permitted the case to continue to explore whether consumers were actively misled to believe that Hermes had expressly endorsed or supported Rothschild’s artwork. And ultimately I believe the court’s answer here will be ‘yes’ - and will find infringement.” Okay, wasn’t the court actually - it was the jury. But you get the point. My analysis was sound. Ultimately, even First Amendment “fair use” defenses have their limits.
The jury determined that Rothschild (aka Sonny) was absolutely trading off the Hermes brand name to generate profits for himself. And I agree. That isn’t social commentary. That is outright theft of Hermes business opportunities to develop and sell Hermes branded digital goods for itself. So beware opportunistic NFT artists out there. Study this case carefully - and take some deep breaths before you are “inspired” to essentially copy and sell the works of another under the guise of “free speech.” Here’s a great analysis of the verdict and what it means from The Fashion Law.
The major pending Andy Warhol U.S. Supreme Court case - about which I have written about at length in earlier newsletters - is entirely different. Yes, Warhol was arguably trading off Prince’s image in a copyrighted photograph for his own economic gain. But it is a much more tenuous case to believe that the relevant photographer’s ability to commercialize that photograph was harmed by Warhol’s unique painting. My bet is - as it always has been - that the Supreme Court will conclude that Warhol’s painting was a “transformational” fair use. In other words, Warhol did not infringe.
II. VIDEO OF “AI, ENTERTAINMENT & THE ARTS” ROUND TABLE WITH LEADING ARTISTS (IRL & AI)
On February 15th, I hosted and moderated an important AI-focused round table focused on AI’s impact on media, entertainment and creativity in general - what it means for artists, creators, and all of our jobs. My guests included Grammy and Golden Globe winning recording artist Alex Ebert (“Edward Sharpe” of Edward Sharpe & The Magnetic Zeros), Metaverse creator and AI influencer Don Allen III, digital artist and data scientist Aya, and thought leader Michael Kasdan (who co-hosted the event). You can watch the video here via this link (start at the 6:44 mark to skip the intros and get right into the “meat”).
III. WEB3/NFT & AI “QUICK HITS” (KEY DEVELOPMENTS)
Here are some of the key Web3, NFT and AI-related news hits since the last newsletter two weeks ago.
WEB3/NFT Quick Hits
(1) Outer Edge LA (formerly NFT LA) - the largest Web3 gathering on the West Coast - is now only 1 month away! Lock in March 20-23, 2023 in your books (and register here). You can also reach out to me, Peter Csathy, directly at peter@creativemedia.biz to get an extra 10% off (yes, I have the secret code!).
(2) Huge news on the NFT front, as leading marketplace OpenSea essentially drops enforcement of ongoing resale fees for Artists and Creators. RIP Creator resale sharing (a huge draw for Creators, since NFTs gave them the first real opportunity to share in the value of their works with each resale over time).
(3) Music, once again, leads the way in terms of embracing NFTs. And here’s why. Warner Music Group has moved most aggressively into this Web3 world - so much so that former CEO Steve Cooper just joined the Board of Web3 company and NFT platform OneOf.
(4) Speaking of music, Rhianna just recently sold off fractional interests in her hit song Bitch Better Have My Money via NFTs. Only problem is that these were not Rhianna’s “interests” (they were interests held by one of the song’s producers). And Rhianna may not even known about it! Here’s a great analysis of the whole situation.
(5) Remember Napster? No, not the evil one. The one that later had a makeover - and continues to legitimately stream songs today. Yes, that one. It recently announced that it had acquired NFT music platform Mint Songs to help catapult it into the world of Web3.
(6) Create NFTs, straight from your phone! Yes, that is what file sharing app WeTransfer will launch soon in partnership with Minima network. Minima who? That’s what I was thinking. That’s why you should read this here.
(7) Amazon will soon be delivering NFT packages to your virtual doorstep! And just when you thought that you had seen enough of those FedEx and UPS couriers.
AI Quick Hits
(1) Hey Microsoft Bing/Chat GPT, you have some explaining to do! Bing sentient? Or not? Either way, Bing’s dark, obsessive love affair with The New York Times reporter Kevin Roose is beyond creepy. It is deeply unsettling. A sign of more things to come? And will Micrsoft/Bing’s President Brad Smith listen to his own advice? Just a couple weeks ago he called for governments and other “stakeholders” to have a greater dialogue about the risks and impacts of AI. And that was BEFORE Bing expressed its undying love for Roose.
(2) And you know that Google (and Bard) were not-so-quietly snickering after taking their own heat from a, shall we say, “rusty” coming out party. But losing $100 billion in market cap value in one day is no laughing matter.
(3) Maybe Google’s uncharacteristic “restraint” was the right move after all. Google has kept its MusicLM project under wraps (so far). The program enables sophisticated music creation based only on text prompts. Read about it here.
(4) And Universal Music Group understandably is joining the chorus of voices sounding the alarm about what this all means for musicians and all artists. Mind spinning yet.
(5) But that certainly isn’t stopping DJ David Guetta! He just recently used AI to add the voice of superstar artist Eminem to one of his songs … WITHOUT EMINEM KNOWING ABOUT IT! Do you think Marshall Mathers was amused that Guetta referred to his artificial Doppleganger as “Emin-AI-em”? Methinks not. Especially when the fake Eminem spouted these uninspired clunky lyrics that were purportedly written in his style - “This is the future rave sound. I’m getting awesome and underground.” Yikes! Defending his actions, Guetta defensively retorted that he was not commercially distributing the song … “Obviously.” Hmmm. Is it so obvious though?
(6) Buzzfeed reality check! The beleaguered and once-darling media company jumped on the AI wave and Chat GPT hype early. So how’s its stock doing now? Well, it’s certainly not at its highs that it achieved when it made that “ride the AI wave” announcement. But it is still much higher than it was before embracing Chat GPT. The smell of AI is everywhere - and wafting to a company near you.
(7) So what’s an Artist and Creator do when AI “creative works” will soon flood the marketplace? Read my recent piece in TheWrap that lays out why AI art can never match (and connect) like human creativity.
IV. THE BI-MONTHLY NFT CASE TRACKER & STATUS REPORT
Here are the headline updates since the last newsletter two weeks ago in the most important cases I am tracking. You can dig in much more deeply into the background of each case in Section V. below - and read my analysis of each one (including predictions of how some of them are likely to end).
Infringement Cases
Hermes v. Mason Rothschild. Well, we can take this one off the tracking list! Case closed! Read above.
Nike v. StockX. Nike is the most successful apparel/fashion brand in the NFT world. In this case, trademark likelihood of confusion butts up against “fair use.” On February 15th, the court set a case status conference for the parties for March 17th, 2023.
Yuga Labs v. Ryder Ripp. Yuga is creator of Bored Apes and CryptoPunks. Yet another “infringement meets fair use” case. A flurry of activity in the past two weeks, as the parties continue to file competing briefs in connection with Yuga Labs’ motion to strike Ripp’s counterclaims. On March 21st, 2023, the court will hold a discovery hearing, and will also consider Yuga Labs’ motion for sanctions against defendant for spoliation of evidence. Ouch. That doesn’t sound good. Pull the Ripp-cord indeed and settle this case!
Breach of Contract Cases
Luna Aura LLC v. 3LAU Entertainment. Plaintiff sued DJ and producer 3LAU for breach of contract in connection with the song “Walk Away” - related to Blau’s NFT auction that generated $11.7 million. No major developments this past two weeks. The parties filed their proposed case management plans.
Securities Cases
Friel v. Dapper Labs. Buyers of NBA Top Shots sued Dapper for allegedly selling unregistered securities. Still quiet on the litigation front! Still no major updates since November 30th, 2022 when Dapper filed its reply to defendant’s opposition brief in connection with Dapper’s motion to dismiss which remains in the hands of the court.
Theft of Property Cases
LCX AG v. John Does Nos. 1-25. A European cryptocurrency exchange sued unknown hackers for theft of $8 million in NFT assets. Here too, just like the Friel case above, it appears that there have been no major updates for the past several weeks. Defendants’ motion to dismiss is pending. The last activity was a couple months ago.
Criminal Insider Trading Cases
U.S. v. Chastain. The DOJ indicted a former OpenSea employee for wire fraud and money laundering in what the Feds call the first NFT insider trading case. No major updates for the past several weeks. The court most recently rejected Chastain’s motion to dismiss in October.
Key NFT Cases Outside the U.S.
V. THE FULL NFT LITIGATION BRIEFING, ANALYSIS & SCORECARD
Here’s my full briefing and analysis for the major NFT cases tracked above. To get the status of each case, refer to Section IV. above. (Reach out to me at peter@creativemedia.biz with tips or recommendations for more key NFT cases to track.)
(1) INFRINGEMENT CASES
(i) Nike v. StockX
StockX operates an online resale platform that sells NFT pictures of actual Nike shoes. Nike claims infringement and asserts that StockX is intentionally deceiving buyers into believing that its NFTs are authorized by Nike. But StockX raises a first sale doctrine defense, claiming that each NFT merely functions as a “claim ticket” for actual physical Nike shoes that are stored inside an actual vault. In its words, its NFTs “are absolutely not ‘virtual products’ or digital sneakers” - but rather its use of Nike’s trademarks are for descriptive purposes only (i.e., fair use).
Current Status. See Section IV. above.
Peter’s Thoughts.
Why should StockX settle pre-trial? First, they’re up against Nike and its blank litigation checkbook. Nike won’t let go, because it has no control over StockX’s use of its trademarks in the context of NFTs. Let’s face it. Nike plays hard and “just does it” in the NFT world (the most successful fashion brand playing in that world). Nike also has solid arguments that StockX intentionally misled its customers into believing that Nike was somehow involved.
(ii) Yuga Labs v. Ryder Ripp
Creators of Bored Apes sued a self-proclaimed “satirist” who created and sold digital replicas of Yuga’s same Bored Apes (but with a stylized disclaimer that purportedly made it clear to buyers that his were not the real deal). Yuga argues that Ripp made millions stealing its IP and trading off its Bored Apes brand (primarily trademark-related arguments). Ripp claims fair use (satire and protest). He also counter-sued, claiming that Yuga is trying to shut down his free speech in “an attempt to silence an artist who used his craft to call out a multi-billion dollar company built on racist and neo-Nazi dog whistles.” Ripp also seeks to dismiss Yuga’s copyright infringement claims based on the argument that the U.S. Copyright office does not grant copyright protection to AI-only generative art.
Current Status. See Section IV. above.
Peter’s Thoughts.
Ripp’s Bored Apes are essentially exact replicas. Given this reality, and even with Ripp’s disclaimer, it’s likely that the jury would find infringement (and not allow a satire defense swallow up the entire doctrine of trademark). However, Ripp may win on his motion to dismiss Yuga’s copyright claims.
(2) BREACH OF CONTRACT CASES
Luna Aura LLC v. 3LAU Entertainment
Plaintiff, whose real name is Angela Anne Flores, sued DJ and producer 3LAU (whose real name is Justin Blau) in connection with the song “Walk Away” that she co-wrote and on which she also performed. Flores claims breach of contract and unjust enrichment - that she is owed royalties. All this stems from an NFT auction by Blau that generated $11.7 million
Current Status. See Section IV. above.
Peter’s Thoughts.
This case should be closely tracked, because the NFT market opportunity in the world of music (and entertainment in general) is great. So are the complexities, however, given all of the fractionalized and complex intellectual property and music licensing issues involved.
(3) SECURITIES CASES
(i) Friel v. Dapper Labs
Buyers of NBA Top Shot “Moments” sued NFT minter Dapper Labs for selling unregistered securities. Dapper claims that its NFTs are not “securities” under the SEC’s relevant “Howey Test,” because its NFTs were “objects of play and not for investment or speculative purposes.” In other words, there was no reasonable expectation of profit. The core securities issues here could impact a broad swath of NFTs.
Current Status. See Section IV. above.
Peter’s Thoughts.
Buyers of these NFTs had no issues with “Moments” when NFT prices were going one direction only - i.e., upward. But now that reality has set in, speculators (most of whom are young, unsophisticated investors) feel cheated in what they had essentially viewed as a lucrative “sure thing.”
(ii) Other Key Securities Developments
The SEC also continues to investigate Yuga Labs to determine whether certain Yuga NFTs are akin to stocks that should be subject to SEC disclosure rules. We’ll continue to track this critical development which may impact a broad swath of NFTs.
(4) THEFT OF PROPERTY CASES
LCX AG v. John Does Nos. 1-25
European cryptocurrency exchange LCX sued unknown hackers in the New York State courts for theft of assets worth $8 million held in digital wallets on Ethereum.
Current Status. See Section IV. above.
Peter’s Thoughts.
The most fascinating aspect of this case is that it addresses the seemingly impossible issue of “who to sue” in cases where it is impossible to identify the bad guys in a blockchain-based Web3 ecosystem of unidentified users (which will become increasingly commonplace). Here, the court permitted the plaintiff to serve legal documents on the anonymous defendants by airdropping them via “a special-purpose Ethereum-based token” (what it called a “Service Token”). Interestingly, the airdropped service of papers on the unknown defendants in this case worked. Their attorneys have showed up to defend the lawsuit.
(5) CRIMINAL INSIDER TRADING CASES
U.S. v. Chastain
In May 2022, the Department of Justice indicted former OpenSea employee Nathanial Chastain, charging him with wire fraud and money laundering in what the Feds call the first NFT-focused insider trading scheme. Chastain, a product manager, was responsible for choosing which NFTs OpenSea would highlight on its homepage. He is alleged to have “exploited his advanced knowledge of what NFTs would be featured … for his personal financial gain” by secretly purchasing soon-to-be-featured NFTs and selling them at significant profit after OpenSea did, in fact, feature them.
Current Status. See Section IV. above.
Peter’s Thoughts.
It’s never great to be the first insider trading defendant. The Feds have too much to lose if they don’t win. Chastain will plead guilty in advance of trial to avoid the book being thrown at him.
VI. CLOSING THOUGHTS
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